Amazon.com, Inc. (AMZN) opened its virtual doors on the World Wide Web in July 1995 and according to the company, offers Earth’s Biggest Selection as well as seeks to be Earth’s most customer-centric company for three primary customer sets: consumers, sellers, and enterprises. The company also generates revenue through other marketing and promotional services, such as online advertising, and co-branded credit card agreements.

The company serves consumers through its retail websites, and focuses on selection, price, and convenience. Their websites are designed to enable millions of unique products to be sold not only by the company but also by third parties across dozens of product categories. The company also manufactures and sells the Kindle e-reader.

The company's business is intensely competitive, and their current and potential competitors include physical-world retailers, publishers, vendors, distributors, manufacturers, and producers of its products, other online e-commerce and mobile e-commerce sites, including sites that sell or distribute digital content.

Additional competition is from indirect competitors, including media companies, web portals, comparison shopping websites, and web search engines, either directly or in collaboration with other retailers, as well as companies that provide e-commerce services, including website development, fulfillment, and customer service.

Management believes that the principal competitive factors in its retail businesses include selection, price, and convenience, including fast and reliable fulfillment. As such, competitive factors for the company's seller and enterprise services include the quality, speed, and reliability of its services and tools.

The stock closed recently at $188.57, with first First Resistance at $189.46, a 0.47% increase from the recent close, Second Support at $206.39, a 9% increase from the recent close, First Support at $172.41, a 9% decline from a recent close, and Second Support at $105.80, a 44% decline from the recent close.

Relative Strength is currently 42, and is correcting from an oversold condition. Coupling this with more downward room in the current pricing environment than there is room for price expansion, we have no short-term interest in this stock at the present time.

Fundamental Investment Considerations

Liquidity: The company ended FY10 with a Current Ratio of 1.33, a Quick Ratio of 1.00, a Cash Ratio of 0.84, and a Cash Conversion Cycle of (51.26) days. In addition, Goodwill and Intangibles comprised 7% of Total Assets. The company had a Book Value of $15.05 and a Tangible Book Value of $12.09.

Profitability: For FY10, the company had a Gross Margin of 24%, an Operating Margin of 6%, a Net Operation Margin After Taxes (NOPAT) of 5%, a Return On Invested Capital (ROIC) of 51%, and an Effective Tax rate of 23%.

Debt: For FY10 the company had Total Debt of $641 million, a year over year increase of 462%. Additionally, the company paid an average annual Interest Rate 6.08%, an 80.5% year over year reduction, had a Debt to Cash Ratio of 0.07, and a Debt to Equity Ratio of 0.09.

Cash Flow: The company's FY10 Operating Cash Flow was $5.04 per share, a year over year increase of 29%, and its Free Cash Flow was $2.89, a year over year decrease of 6%.

Dividends: During FY10 the company paid a dividend of $0.00 per share.

Earnings Growth Valuation

Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Amazon.com, the company had year over year earnings growth of 34%, ending FY10 with earnings of $3.70 per share.

With a trailing twelve month PE of 51, the spread between earnings growth and the PE is about 0.7, meaning that for an investor focusing on earnings growth, the stock should be trading near $191.02, a $2.45 increase from a recent close.

Fundamental Valuation

Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $47-$50 range.

Value Thoughts

Considering a recent close of $188.54, an estimated Merger and Acquisition payback of 39.8 years (assuming EBITDA remains the same), year over year earnings growth of 34%, as well as a year over year free cash flow decline of 6%, we think the stock is currently OVER PRICED, and not a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer

We have no position in Amazon.com, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

About the author:

wax

Wax Ink is a baseline equity research company not licensed or registered with any government agency

Comments

The author makes a fairly obvious case to my mind - that Amazon is dramatically overvalued. Yet we see from the so-called rating that "thou shalt not say anything negative about Amazon" or we give you low marks. Perhaps not the best written article ever but I'm short Amazon. Anybody who reads the Amazon cash flow statement and compares it to the current market value should at least admit that the valuation is stretched (if not absurd).

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